Debt recovery and debt collection are similar terms with one small, but very important distinction. The difference is who is trying to retrieve a debt.
Debt collection is a creditor’s attempt to recover consumer credit and loans that have not been paid back by a customer.
Debt recovery is when a loan—such as a credit card balance—continues to go unpaid, and a creditor hires a third party, known as a collection service, to focus on collecting the money.
Debt recovery is important because it is directly correlated to your credit score. If you are being contacted by a debt recovery service, it means there is a record that you have defaulted on a loan and currently have delinquencies. These delinquencies get reported to the credit bureaus, damaging your credit score, which can potentially hurt any future loan opportunities.
There are several steps in the debt recovery process and it is important to know what to expect when you are contacted by a debt recovery agent. In fact, because financial debt can be a sticky situation, legislation has been established to guide the debt recovery process and ensure that consumers are protected from harassing debt recovery practices.
Debt Recovery Terminology
- Debtor: person obligated to pay back money that was borrowed
- Creditor: person who extends credit with an agreement that the money loaned will be paid back
- Third party collector: person or service that is contracted to collect debts for a creditor
The Debt Collection Process
The debt collection process starts when there is a missed payment on a credit card or loan. The debtor has 30 days from the bill due date (not the billing date) to make the payment before it is reported to the credit bureaus. During this time, the creditor will try to contact the debtor by phone, email or letter to get their payment and any late fees. It’s best to take care of the debt during this 30-day window. The debtor can explain his/her situation and set up a repayment plan.
After 30 days, the debt is handed off to another department at the same company that specializes in retrieving delinquent debt. This isn’t a collection agency, just a department within the lending company. They could report your delinquency to a credit bureau and shut down your credit card account.
After 180 days, the creditor usually will contract the debt or write it off their books and sell it to a debt collection agency. Be aware that the creditor might contract or sell the debt at any time before the 180 days, so it’s best to act sooner rather than later.
Debt Recovery Process
Once the debt belongs to a collection agency, the creditor will send the claim information and supporting documentation to the debt collector noting your failure to pay according to the terms of the agreement. After the claim is reviewed and accepted by the debt collection service, the recovery process begins with a demand letter being sent to the debtor and an acknowledgement letter being sent to the client (creditor who enlisted the collection service).
The account is now active and the debt recovery efforts involve the following:
- Telephone contact begins in attempt to arrange payment for the outstanding balance and ensure that the payments are realized.
- If the debtor does not cooperate with resolving the debt, the debt collection service updates the client with details on forwarding the claim to the affiliated attorneys.
- Forwarded claim is signed by the client and sent to the affiliated attorneys, and if attorneys recommend legal action, suit requirements are provided.
- If client authorizes the legal action and agrees upon suit requirements, the lawsuit is prepared and filed. If the client doesn’t want to pursue legal action, the claim is worked on for an additional 60 days by the debt collection service and then closed.
- Complaint is served. If debtor files a response, the discovery process begins and a trial date is set. If debtor does not respond, a default judgment is filed by the attorneys.
- If a judgment is awarded in the client’s favor, attorneys will file a Writ of Attachment, attempt to locate debtor’s assets, and initiate steps to satisfy the judgment (bank levies, garnishments, liens, etc.).
What to Do When a Debt Collector Sues
Let’s say you are served a debt collection lawsuit and summoned to court. The best advice is DON’T IGNORE THE PROBLEM! If you fail to respond or show up in court, the judge grants a default judgement against you.
In most cases, there will be a settlement conference or arbitration before the trial. This gives you and the debt collection agency an opportunity to reach an agreement and avoid a trial and the legal fees that go along with it. The debt collector could pursue a summary judgment if none of the facts are disputed, and win without a trial. Most cases will get settled or end in a summary judgment.
If the case moves on to trial, you should have a consumer lawyer representing you. The case proceeds like a normal trial. Both parties give their side of the facts, and the judge makes a decision.
If a debt collector receives a judgement against you, they are entitled to the amount owed and can use alternative debt collection techniques. They can garnish wages, seize valuable property, place a bank levy (freezing the account) or a lien on your home, guaranteeing them a portion of the money on the sale of the property.
Fair Debt Collection Practices Act
The Fair Debt Collection Practices Act (FDCPA) is government legislation that offers consumers protection from illegal and unethical tactics by the debt collection services. It was enacted on September 20, 1977 by the Federal Trade Commission (FTC) in response to a large number of abusive practice reports.
Under the FDCPA, a debt collector is not permitted to do the following:
- Call you an unreasonable amount of times, before 8 a.m. or after 9 p.m., or contact you at your place of employment if your supervisor disapproves.
- Disclose information regarding your debts to uninvolved third parties.
- Use harassing, profane, or accusatory language.
- Misrepresent the factual information surrounding the debt or threaten to communicate false credit information.
- Make further contact with you after a Cease and Desist Letter has been sent.
How Creditors Establish Compliance With the FDCPA
To be in compliance with the FDCPA, the debt collector must send a dunning letter, or written communication containing several pieces of information.
They are as follows:
- Amount of the debt
- Name and address of the creditor who is owed the debt
- That the debt will be assumed valid if the debtor doesn’t respond to the communication within 30 days of receiving it
- That if the debtor disputes the debt in wirting within 30 days. the debt collector will send verification of the debt
- That if you request the name and address of the original creditor within 30 days, if different from the current creditor, the debt collector will provide that information.
Your Rights Under the FDCPA
As part of the FDCPA, you are protected from debt collection harassment. If you are being contacted by a debt collection agency and you want them to stop calling you, it is advisable to communicate only in writing, as it gives you a record of every exchange regarding the alleged debt. This is called a cease and desist letter.
A cease and desist letter should be a simple and direct notification that you do not want to have any further communication with the debt collection service. Send the letter certified mail with a return receipt request.
*Note: The cease and desist letter only applies to third-party collection services and not the original creditor who gave you the loan.
By law, the debt collection service must stop all communication, with the exception of a final notice.
The final notice will list one of the following actions that will be taken:
- Further efforts to collect the debt will be terminated
- Certain legal actions may be taken by the creditor
- The debt collector definitely will be taking specific legal actions
Be sure the cease and desist letter is going to the correct debt collection agency. Accounts change hands quickly and you may be dealing with a new collector who has control of your account. If so, send the new collector a cease and desist letter.
If the collection agency continues to ignore the cease and desist letter, contact the Consumer Financial Protection Bureau or your state attorney general’s office and file a complaint.